Weekly Market Report 01-28-2005

Market post first gain of the year
By Rick Paler


The stock market posted its first weekly gain this year on positive earnings news. Overall sentiment remains cautious ahead of the Iraq elections taking place this Sunday. Merger activity continued this week with announcements from both Procter & Gamble and SBC Communications. Economic reports for the week were generally positive with no big surprises.

After watching the market slide downwards the first three weeks of 2005 the market managed to squeeze out a small gain this week. Positive earnings news was the main impetus for the gain. As I have mentioned in previous articles, I believe that fourth quarter earnings for the S&P 500 would come in at 16% earnings growth or better. Now that we are in the middle of the reporting season Wall Street analyst as a whole are estimating a 17% gain in earnings over last years same period. This is very impressive considering that earnings for the fourth quarter 2003 grew by 28.3%. This earnings growth continues to be fueled by productivity increases, the weaker dollar, and strong consumer spending. Although corporate earnings remain at record levels the sentiment remains cautious with many traders waiting for this weekend’s election in Iraq. Many fear major terrorist attacks and a disruption in Iraq’s oil production. This was evident when Microsoft posted excellent results and Procter & Gamble announce their merger plans with Gillette and the market as a whole barely moved upwards.

In corporate news as I anticipated merger mania continued this week with rumors that SBC Communications (SBC) was looking to merger with AT&T (T) and Procter & Gamble (PG) announce their plans to purchase Gillette (G). Again I will state that I expect this kind of merger activity to continue throughout this year. This is due to the fact that U.S corporations are sitting on record amounts of cash.

SBC Communications (SBC) is rumored to be in current talks with AT&T (T) to purchase the once dominate telecommunications company known as Ma Bell for an estimated $15 billion. The deal would have to pass antitrust regulatory review.

Procter & Gamble (PG) announce plans to acquire Gillette (G) for a massive $57 billion. The merger would create the world’s largest consumer product company exceeding the size of European rival Unileaver (UN). The company said that shareholders of Gillette would receive 0.975 shares of P&G for each share they hold. P&G also said that they would purchase $18 billion to $22 billion of its own stock over the next 12 months.

Microsoft (MSFT) earnings for their fiscal second quarter excluding items came in at $0.35 per share topping the streets estimates of only $0.33 per share. The company cited strong personal computer sales and the release of Halo 2 game for their Xbox gaming system. The company also raised their full-year revenue guidance to $39.8 billion to $40.0 billion.

Newell Rubbermaid Inc. (NWL) exceeded analyst earnings estimates by two cents when they announced earnings excluding items of 127 million or $0.46 per share. This compares favorably from last years loss of -$211.6 million or -$0.77 per share for the same period.

Estée Lauder Companies (EL) reported profits rose by 44.5% to $138.3 million or $0.60 per share exceeding Wall Streets estimates of $0.57 per share. The company said that the saw strong sales growth across all product lines.

Rayonier’s (RYN) fourth quarter income rose to $13.5 million or $0.26 per share and reported that their full-year 2004 net income came in at $3.08 per share compared to last years $1.16 per share. This was the company’s first year of operation as a REIT which gave the company a tax benefit of $49.7 million or $0.98 per share in the first quarter 2003.

In economic new, reports this week were mixed yet still indicated that the economy continues to grow. An unexpected raise in consumer confidence was reported by the Conference Board this week. Economist anticipated a reading of 101.0 for January yet the report indicated that consumer confidence rose to 103.4 indicating that consumer spending should remain strong.

The advanced Gross Domestic Product figures indicated that the economy continues to grow at a rate above the historical average, but the number missed economist estimates. The advanced GDP reported that the economy grew in fourth quarter 3.1%, economist had anticipated a reading of 3.5%.

Bond rates continue to rise on the short end of the yield curve as traders anticipate the FOMC to raise the Fed Funds rate again at their next meeting in February. The 5 year Treasury note closed yielding 3.68% this week, while the 10 year closed yielding 4.13% and the 30 year bond closed yielding 4.60%.

Next week could be another positive week for the market. If the elections in Iraq on Sunday proceed without major disruptions, it would remove some of the cautious sentiment in the market. This will allow traders to focus on the positive earnings the S&P 500 companies are posting. Companies that will release earnings next week that will be of interest are AFLAC (AFL), Exxon Mobile (XOM), Fuji Photo (FUJIY), Walt Disney Co. (DIS), Chubb Corp. (CB), Google (GOOG), Anheuser-Bush (BUD), Boeing (BA), and PepsiCo (PEP).